Rescue Me: Tesla Seeks $400M in DOE Loans

Silicon Valley electric car startup Tesla Motors has applied for about $400 million of a $25 billion government loan package designed to help automakers produce more efficient vehicles and meet new fuel economy standards. Diarmuid O’Connell, Tesla’s V-P of corporate development, revealed the amount in an interview with peHUB Wednesday, less than three weeks after CEO Elon Musk declared a $40 million round of convertible-debt financing “significantly more than we need.”

Promised by existing investors, the $40 million was supposed to help Tesla expand its powertrain supply business, ramp up production of the Roadster, and cover general product development costs. But that was then, when the company was reeling from market turmoil that derailed plans to raise $100 million in private equity. This is now, when the industry Tesla once sought to upturn has turned down — way down — such that bankruptcy appears a very real option for Detroit’s automakers.

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According to O’Connell, Tesla would use the direct loans for two projects: a new battery manufacturing operation, and a delayed mass-market sedan, now called the Model S. O’Connell, a beltway insider who has led the company’s lobbying efforts since leaving the State Department three years ago (he was a mid-ranking chief of staff under Colin Powell), said Tesla hopes to secure the low-interest loans by January or February 2009. He said the manufacturing operation could be set up in “a matter of months,” although Tesla has a history of setting timelines on the optimistic side.

All of this is if, a big if, the loans win approval. Tesla isn’t the only startup angling for a piece of the package, which includes $2.5 billion (coincidentally equal to GM’s net loss last quarter) set aside for automakers and suppliers with 500 or fewer employees. Powertrain maker AFS Trinity Power, another startup, announced plans this week to request that amount for converting a shuttered SUV plant into a plug-in “extreme hybrid” factory.

Like the Big Three, Tesla and AFS face more than few hurdles before snagging those loans. As the Detroit News explains, interim rules established by the DOE favor projects involving factories that are at least 20 years old (a boon for AFS) and require that companies demonstrate financial viability for the term of the loan (up to 25 years). In other words, there has to be reason to believe they’ll be in business in the 2030s and beyond. O’Connell told us today he expects Tesla to have significantly shorter loan terms, if approved, than the maximum allowed.

While O’Connell did not comment directly on whether lawmakers should bail out the Big Three, he made no bones about Tesla’s stance on removing green strings attached to the already-approved package. The company, he said, is “adamantly opposed to changing the rule as it’s currently written.”

The headline and conclusions of your article are very misleading and require clarification.

Long before the Detroit 3 starting seeking immediate emergency bridge loans to avoid bankruptcy (at least in the case of GM and Chrysler), $25B in loan guarantees had been appropriated in the Energy Bill passed in 2007 for the express purposes of helping auto manufacturers accelerate the development of tomorrow’s more efficient technologies.

Tesla has applied for loan guarantees under this program, and does not seek a “bailout.” In our opinion, the projects that we have submitted in our applications are ideally suited to the intent of the original bill’s provisions, as Tesla is in the business of producing only zero-emissions cars utilizing pure electric drivetrains.

In the meantime, the administration and some on capitol hill have suggested that these funds be redirected to the short term operating needs of the big 3 as a short term solution to immediate liquidity problems. As Diarmuid pointed out, we are opposed to that.

As for Tesla’s financing requirements, we previously announced that the $40 million in bridge financing should be more than enough to bring the company to cash flow positive in the two revenue producing businesses we currently have – the Roadster and our third party powertrain business. We have always said that accelerating our efforts with the Model S would require additional capital, and that we would seek that additional capital at a later date at the right terms.

This additional capital will likely be a mix of equity and debt, and if the government is offering low cost loan guarantees specifically to support the development of advanced vehicle technologies for the benefit of all, why shouldn’t Tesla utilize such a program?

Remember, although Tesla’s current product, the Roadster, carries a high price point, the advanced technology we have developed in the Roadster is a precursor to technologies that will appear in more and more cars at lower price points in the future. Getting there quicker is good for everybody, and we are committed to that goal.